Citigroup layoffs may not go far enough

FORTUNE — Citigroup CEO Michael Corbat missed his chance to make a good first impression. His second impression seems to be winning more fans.

Corbat took over from Vikram Pandit in mid-October in what appeared to be a chaotic mess. There was a hastily called meeting with analysts in which Corbat was pushed to say what he planned to do differently with the bank. Break it up? Finally dump the rest of Citi’s toxic assets? Corbat didn’t seem to have a clue.

Nearly two months later, Corbat has an answer – can 11,000 people. Citi’s shares C rose on the news Wednesday, up 7%.

It was clear that Pandit, who resisted mass layoffs, no longer fit the times. The metric that investors and Wall Street execs seem most focused on these days is something called the efficiency ratio. It compares a bank’s expenses to its revenue. The lower the number the better. All of a sudden, Wall Street wants to be Wal-Mart. Even the mighty Goldman Sachs GS recently told investors its goal is to be the low-cost provider.

After the layoffs, Citi will have an efficiency ratio of 63%. That’s better than its rivals JPMorgan Chase JPM and Bank of America BAC, which have ratios of 65% and 86%, respectively. But not all efficiency ratios are created equal. Investors will tolerate higher costs if you can show them that you will be able to produce higher revenue. That’s a problem for all the big banks, but more so for Citi than its direct rivals.

Historically low-interest rates, which the Federal Reserve isn’t likely to raise anytime soon, are squeezing loan revenue. Income the banks generate from fees, however, like investment banking or asset management, won’t be under the same pressure.

Unfortunately, Citi, which has struggled in investment banking, only generates about 40% of its revenue from fees, compared to 53% and 55% at Bank of America and JPMorgan, respectively. And that is likely to shrink further at Citi. About a quarter of the bank’s cuts will come from its investment bank. Pandit had talked about simplifying the bank, which seemed code for getting out of Wall Street’s riskier businesses.

But if Corbat wants to do that he will have to cut costs much more dramatically than he has. His lending-centric rivals Wells Fargo WFC and U.S. Bancorp USB have dramatically lower efficiency ratios, of 54 and 48, respectively.

To get its costs down that low, Citi would have to finally sell off what remains of its subprime lending division and other business units that have been in wind-down mode since the financial crisis. Those divisions, dubbed Citi Holdings, generate the biggest drag on efficiency because they account for little revenue and a huge amount of costs.

But the restructuring plan that Citi presented Wednesday does little to pare down Citi’s former toxic assets. Just 5% of the cuts will come from Citi Holdings.

Christopher Whalen, a senior managing director at Tangent Capital Partners, says another option for Citi is to dive back into the subprime mortgage businesses. That’s one area where the bank could get higher than average interest income. It’s also a business with very little competition and a lot of demand – millions of borrowers still want out of the loans they took when interest rates were much higher. That would be a risky maneuver, and one that could turn off some cautious investors. But it would be a bolder call than just showing that the bank can be more of a tightwad than its nearest competitors.

After reviewing Citi’s restructuring plan, analyst Mike Mayo, a long-time critic of Citi, wrote to clients, “We view this move as an initial ‘tremor’ and that an ‘earthquake’ or more radical restructuring is needed.”

It’s time to really shake things up, if Citi is going to succeed. It’s not clear Corbat gets that yet.